Dividend Watch: 7% Yields or More in Muni-Bond Funds (BFK, LEO, EIM, IQI, NMZ, PML, MHI)

Time for “The Daily Dividend”… Did Meredith Whitney scare you out of buying or owning a municipal bond when she warned of dozens of impending municipal bond issuer failures?  She definitely shook up the market, even though many pundits are claiming that she really blew things way out of proportion.  Sadly, Meredith Whitney is probably right that there are many cities, counties, and municipalities which are actually closer to serious financial trouble than they would want you to believe.  Our job is to find opportunity out of madness.

We will probably never write about a single issuer in municipal bonds.  What we will cover is some of the high yields that can now be found in the closed-end mutual fund market.  These are just like Exchange Traded Funds, except that they are fixed in size and they trade at premiums or discounts to the net asset value.  After looking through a whole group of these in recent days, there are many municipal funds here which offer dividends of 7% or even higher.  If you have a tax bracket of 30% or higher, this can give you a taxable-equivalent yield of 10% or higher.

Amazingly, you don’t even have to go out just to California-only, Michigan-only, or other questionable states to get these high tax-free yields.  Here are several closed-end municipal bond funds which offer high yields, with supporting data included:

BlackRock Municipal Income Trust (NYSE: BFK) pays about $0.08 per month to holders and at $12.36 it has a yield of close to 7.8%.  Its market cap is close to $550 million, average daily volume is almost 100,000 shares, and its 52-week trading range is $11.15 to $14.66.

Dreyfus Strategic Municipals Inc. (NYSE: LEO) pays about $0.040 per month in dividends and at $8.03 it has a yield of close to 7.3%.  The market cap is $490 million, average volume is about 127,000 shares, and its 52-week trading range is $7.05 to $9.40.

Eaton Vance Municipal Bond Fund (AMEX: EIM) pays $0.076 per month and its $11.45 price generates a dividend yield of about 8%.  The market cap is about $778 million, average daily volume is about 175,000 shares, and its 52-week trading range is $10.25 to $14.00.

Invesco Quality Municipal Income Trust (NYSE: IQI) pays about $0.071 per month and its $12.02 share price generates a dividend yield of about 7.2%.  The market cap here is about $282 million, its average daily volume is about 45,000 shares, and its 52-week range is $11.09 to $14.15.

Nuveen Municipal High Income Opportunity Fund (NYSE: NMZ) pays a monthly dividend of about $0.084 and a $11.78 generates a yield of close to 8.5%.  The market cap is about $315 million, average volume is almost 80,000 shares, and the 52-week trading range is $9.12 to $13.60.

PIMCO Municipal Income Fund II (NYSE: PML) pays a dividend of $0.065 per month and its $10.21 share price generates a yield of about 7.7%.  The market cap is $614 million, average volume is about 175,000 shares, and the 52-week range is $9.23 to $12.09.

Pioneer Municipal High Income Trust (NYSE: MHI) pays a dividend of $0.09 per month and its $13.16 price generates a yield of over 8%.  The market cap is $293 million, the average volume is almost 70,000 shares, and the 52-week trading range is $12.32 to $15.48.

You have to do your own due diligence on each fund.  Some municipal funds use leverage, some trade at steep premiums or discounts to the net asset values, and some have instruments in their portfolios which a basic investor will either have zero access to or which they do not understand.  There are also rules about dividends and net asset values that can come into play. Some states only consider a municipal issue as being free from state income taxes if the municipal issue comes from within that state, while others allow all municipal bonds to be tax free.

We tried to default to one of the highest yields per closed-end fund management family.  Many smaller funds with higher yields were skipped due to minimal volume or due to dividend fluctuations.  As you can see, there may be quite a scare out there in municipal bonds but there is also a great opportunity for those who can ferret out which ones are safer.

As always, understand what you are investing in.

JON C. OGG